Election 2012: Democrats, Republicans offer clear choice on taxes

At the center of the fall campaigns, from the presidential race on down, is whether to extend all or some of President George W. Bush's temporary tax cuts which are set to expire at the end of the year.

President Barack Obama wants the Bush-tax cuts to expire for people making over $250,000 a year as a way to help rein in a nearly $1.2 trillion federal budget deficit and more than $16 trillion national debt. The president has said the "wealthiest Americans" need to pay their "fair share" in helping to deal with the deficit crisis, which includes steering the country away from driving over the fiscal cliff of the looming sequestration cuts.

Approximately 19,500 households of the 620,000 households in Hampton Roads, roughly 3 percent, make more than $200,000 dollars a year, according to 2010 U.S. Census estimates.

A July study by accounting firm Ernst & Young points out, however, that increasing tax rates for higher income earners would affect more than just individual households, as many small-business owners file their taxes using the individual taxpayer rate. The Congressional Joint Taxation Committee estimates that 53 percent of net positive business income is taxed this way.

Republican presidential nominee Mitt Romney wants to extend the Bush tax cuts for all income levels, provide additional tax cuts, and reduce the corporate tax rate. Romney has said he wants to "bring tax rates down for everyone" while keeping any tax cuts revenue neutral, meaning despite lower tax rates overall, the federal government would still bring in the same amount of money.

An August study by the Brookings Institution/Urban Institute joint Tax Policy Center said it would be difficult under Romney's plan to keep his tax cuts revenue neutral without shifting the tax burden to middle- and lower-income earners by reducing or eliminating tax exemptions and deductions.

Simply put, a structural deficit develops when spending outpaces revenue. The federal government now spends 23 percent to 24 percent of the Gross Domestic Product, which measures the value of all goods and services produced in the country.

Current revenue is roughly 17 percent of GDP.

To make up the difference, the federal government borrows roughly 40 cents on every dollar it spends. That has led to the rapidly growing national debt, which most economists agree is unsustainable in the long run.

Jesse Richman, professor of political science at Old Dominion University, said the deficit can be overcome by the cuts-only approach favored by most Republican lawmakers and candidates, most of whom have signed political activist Grover Norquist's "no-new-tax pledge."

Richman said to make up the gap, the cuts must be large and deep and must affect many key, popular government programs. But, he said, it's not clear that either large cuts or significant tax increases are "politically palatable."

Kidd said Americans are looking at economic pain going forward regardless of which side's policy argument wins out, or even if a compromise is reached. The question, he said, is who will carry the largest burden.

Richman and Kidd said the studies by Brookings and Ernst and Young are both legitimate. The difference between them is which issues they focus on. The Brookings Institution, a center-left think tank, bolsters Democratic arguments against Republican policy goals. Ernst and Young, which Kidd describes as "chamber of commerce conservative," favors Republican arguments against Democratic policy plans.

The Brookings' study looked at Romney's plan to extend all Bush-era tax cuts, reduce tax rates by 20 percent, repeal the alternative minimum tax, eliminate the estate tax and end taxing of investment income earned by most taxpayers, while keeping the tax code revenue neutral.

Romney has proposed eliminating certain tax preferences and exemptions to compensate for the cuts. He has not detailed which preferences and exemptions he would target.

To achieve that balance, the Brookings study says, Romney would have to severely reduce or eliminate some of the biggest and most popular tax exemptions, such as the mortgage interest deduction, the deduction for charitable contributions, the earned income tax credit and the child tax credit.

The study concludes that the plan "will result in a net tax cut for high-income taxpayers and a net tax increase for lower- and/or middle-income taxpayers."

The Obama campaign referenced the study in a TV attack ad to support its claim that Romney wants to raise taxes on the middle class.

Donald Marron, director of the of the Tax Policy Center, wrote in a post on the center's website that he didn't agree with the inference the Obama campaign made from the study.

"I don't interpret this as evidence that Governor Romney wants to increase taxes on the middle class in order to cut taxes for the rich, as an Obama campaign ad claimed," Marron wrote. "Instead, I view it as showing that his plan can't accomplish all his stated objectives."

Businesses hurt

Ernst and Young examined Obama's proposal to let the Bush-era tax cuts expire for households with incomes greater than $250,000 a year. That would take the highest tax rate back to 39.6 percent from the current 35 percent. The second-highest tax rate would return to 36 percent from the current 33 percent.

All of the local Republican candidates oppose that idea, and some Democrats would change it. U.S. Senate candidate Tim Kaine would let the tax cuts expire for income over $500,000. Paul Hirschbiel, the Democratic candidate in the 2nd Congressional District, would let the tax cuts expire on annual income over $1 million.

The study found that under Obama's proposal, 2.1 million businesses nationwide would see tax hikes, with a 1.8 percent decrease in workers' wages. The study said Virginia would lose 19,900 jobs and $5.8 billion in economic output.

The problem, the report said, is that 54 percent of the private-sector work force is employed by "flow-through" businesses — such as S corporations, partnerships, limited liability companies and sole proprietorships — that use individual tax rates rather than corporate tax rates.

Most of these types of business are in the service and construction industries and include one-third of the nation's banks, mostly community banks, according to the study.

The study concluded that "allowing the top tax rates to increase comes with economic consequences. Long-run output can be expected to fall, and, depending on the use of the revenues, living standards, as reflected by workers' real after-tax wages, may also be lower."

Election outcome

Kidd and Richman said the results of the election will be key to determining the fate of the Bush tax cuts. This is especially true since a lame-duck Congress, and possibly a lame-duck president, will simultaneously be working to avoid the roughly $1.2 trillion in sequestration cuts set to go into effect Jan. 1.

The sequestration cuts were the result of a deal last summer between Republican lawmakers and the White House to raise the debt-ceiling and avert a government shutdown and to keep the nation from defaulting on its debt obligations.

The out come of the election for both the presidency and control of Congress will give one party or the other a stronger bargaining position as negotiations go forward, Richmand and Kidd said.

"If Obama gets re-elected, the chess pieces get set on the table one way," Kidd said. "If Romney wins the election, the chess pieces get set out another way."

Tax cuts on the table

Here's a quick rundown of the tax breaks that could expire at year's end:

"Bush-era" tax cuts

Enacted in 2001 and 2003 under President George W. Bush, these tax cuts were supposed to expire in 2010, but were extended in December of that year and now expire Dec 31. Here's how they affected tax rates for married individuals filing joint returns:

Income, original rate, reduced rate, saving per thousand*

$388,350+, 39.6%, 35%, $46

$317,450+, 36%, 33%, $30

$142,700+, 31%, 28%, $30

$70,700+, 28%, 25%, $30

$17,400+, 15%, 15%, $0

*saving is per $1,000 of tax liability

Source: Consumerism Commentary, IRS

Payroll tax cuts

Affecting 160 million American workers, this cut was enacted in December 2010 under President Barack Obama to stimulate the economy. The cut has been extended twice and is now set to expire Dec. 31. It temporarily reduced the Social Security tax from 6.2 percent to 4.2 percent for up to $110,100 in income. For example:

"The president believes that everyone should pay their fair share, and that our tax laws should reward responsibility and hard work. That's why the president cut taxes for 95% of working families, passed 18 different tax cuts for small businesses, and under President Obama, tax rates for middle class families are at their lowest since 1955. This notion of shared responsibility is completely absent from the Republican ticket's tax plan, which, as independent experts point out, raises taxes on middle-class families with children by more than $2,000 a year in order to give millionaires an additional budget-busting 25-percent tax cut."

"President Obama's economic plan to increase taxes on small businesses and job creators would cost Virginia nearly 20,000 jobs and $5.8 billion in lost economic output. After yet another devastating jobs report, raising taxes is the last thing we should do if we want to get our economy moving in the right direction. In contrast, Mitt Romney and Paul Ryan have a five point plan for a stronger middle class, including detailed policies on tax reform which would lower rates across the board, increase take-home pay, and help create 345,000 jobs in Virginia."

"George Allen believes America needs comprehensive tax reform for sustained economic prosperity. He calls for a more simple, fair and competitive tax code through lowering the tax on job-creating businesses from 35 percent to 20 percent, giving Americans the option of a flat tax on personal income, and leveling the playing field and encouraging innovation through fair, permanent tax deductions. The last thing Congress should be doing is raising taxes because tax increases don't create jobs. George Allen will be the voice of hard-working Virginians and small business owners who need a government that listens more and taxes less."

Tim Kaine spokeswoman Lily Adams:

"As governor, Tim Kaine lowered and eliminated taxes for hundreds of thousands of Virginians, including eliminating Virginia's estate tax, and presided over the largest decrease in the Commonwealth's tax burden in decades. As a senator, Tim Kaine will support measures to close loopholes and exclusions that burden our small businesses, and advocate tax incentives for research and development and higher education that will spur economic growth for the long run. Tim Kaine knows giving tax breaks to companies like Exxon Mobil won't grow our economy but that instead, we need to provide our small businesses with the tools they need to succeed."

"Higher taxes won't get anybody hired. Through tax reform, we can encourage an economic turnaround through innovation, and the entrepreneurial spirit that has made this nation great. Government must be efficient with the dollars invested in it by hardworking taxpayers. While government must provide a safety net, a lean, efficient government allows our economy to thrive and for Americans to spend their income as they see fit: to provide for their families, their children's education, and more. By enabling small businesses to invest and innovate, they can get help to get our economy back on track and put Virginians to work."

Democrat Adam Cook:

"Our nation's two largest problems right now are a weak economy and an unacceptably large deficit. We therefore have to find a way to reduce our deficit without inflicting more pain on middle class families around the country. The middle class has been hammered since the onset of the recession in late 2008, but even before that, middle class families have been seeing their family budgets squeezed as wages have stayed flat while the costs of everything from health care and college tuition to prices at the pump have steadily increased. Because of that middle class squeeze, I am adamantly opposed to any tax increases on the middle class, including by phasing out deductions that many families rely on. I do, however, believe that those who have benefited the most from the American economic system should be asked to pay a little more to preserve that system for the next generation coming up."

"Our current tax code, all 55,000 pages of it, reeks of the influence of lobbyists. I support the elimination of lobbyist-inspired loopholes and tax credits, broadening the tax base, and giving Americans, including our nation's small business owners, a tax code that is simpler and fairer. I am committed to stopping the source of much of the problem: former Members of Congress who use what they learn in Congress to become professional lobbyists. I have a self-imposed, lifetime ban on lobbying and will never be a lobbyist, nor will I agree to meet with a former Member who has become a lobbyist. We can fix our tax code, but it requires more Members to lead by example."

Democrat Paul Hirschbiel:

"To help get our economy moving, we need to put in place a balanced, bi-partisan deficit reduction plan that eliminates uncertainty and encourages our employers to start hiring again. As part of that plan, we need a simpler tax code that lets the Bush tax cuts expire on individuals making over one million dollars a year, ends subsidies for big oil companies, and eliminates loopholes that allow the world's largest companies like GE to pay no taxes while small businesses continue to foot the bill."

3rd District

U.S. Rep. Robert C. "Bobby" Scott:

"I opposed the Bush tax cuts in 2001 and 2003 and I opposed their extension in 2010. Congress should let all of the Bush tax cuts expire as scheduled at the end of the year. Fiscal responsibility requires making tough, often unpopular choices. Obviously letting tax cuts expire is unpopular. But if we ever get serious about the deficit, we will find that the realistic alternatives are even more unpopular. A return to Clinton-era tax rates with the additional revenue temporarily directed towards job creation would stimulate the economy and get us on a path to fiscal sanity."

Republican Dean Longo:

"We need to get the economy working again. Giving the government more money by increasing anyone's taxes isn't the answer. Unemployment in the 3rd District is 65% higher than the average for Virginia; African-American unemployment in the District reaches 25%. Personal and business tax policies are among the most effective tools to help jump start the economy and bring jobs. We must give businesses incentives to expand. We must also allow people to keep as much of their money as possible. The expansion of business creates jobs, the increased cash increases personal spending. Together grow the economy."

"Americans are not under taxed - our government is overspending. Increasing tax burdens on the middle class and small businesses won't expand opportunity or build the savings of working families in the Fourth District. In fact, according to a recent independent study by Ernst & Young over 700,000 jobs would be lost if taxes were increased. I was one of only 17 to vote against every bailout and stimulus under both Bush and Obama. I've introduced and supported legislation to tie member salaries to spending, to root out rampant fraud and waste, to audit defense spending, and to strengthen critical programs like Medicare and Social Security. I've also supported common sense tax reforms such as eliminating unfair loopholes and reconstructing the tax code."

Democratic Chesapeake City Councilwoman Ella P. Ward:

"In the short term, I support the plan to keep current tax cuts in place for the middle class, excluding those with incomes over $250,000. If the wealthiest of Americans, including millionaires and billionaires are willing to pay their fare share of taxes, this will contribute to reducing our national debt.

In the long term, I support a total overhaul of our tax system. I favor a simpler tax code that eliminates many deductions so the average citizen can prepare his/her own return. I would retain the mortgage interest deduction because it encourages home ownership. I would also retain the deduction for charitable contributions. The overhaul I propose would be more equitable than the current system. It would eliminate many deductions solely designed to reduce the taxes of the very wealthy."